Question

QUESTION FOUR
The following ratios have been calculated from the most recent financial statements for Goodman Enterprises and Kwiksave Limited. Both businesses operate in the retail industry.

Goodman Enterprises       Kwiksave Limited
Average collection period    55 days 22 days
Gross profit margin 39% 13%
Average days in inventory 46 days 23 days
Net profit margin    9.9% 9.9%

REQUIRED:
(a)   Compare and contrast the profitability and liquidity of Goodman Enterprises and Kwiksave Limited on the basis of the ratios above. (word limit: 300 words)

(b)   Explain which of the two businesses is likely to be operating in a price-competitive environment and to what extent this has impacted on their net profit margin. (word limit: 150 words)

Answer 1

Answer:

Sr. No.	RETAILERS	Average Collection In days	G.P	N.P Margin	Average Inventory
1	Goodman Enterprises	55	39	9.90%	46
2	Kwiksave Limited	22	13	9.90%	23

Debtor collection Period :-

The Good man Enterprize is collecting its debtors in 55 Days whereas the collection of Kwiksave is far Better i.e 22 Days . ..

The more days amount remains with debtors for collection the more financing cost of that locked money the organisation has to pay .

In the question Goodman Debtors collected in 55 days i.e turnover in year of debtors 365/55 =6.636 Times

Kwiksave Turnover of debtor 365/22 =16.59 Times

Hence Kwiksave is profitable as per this ratio as money is rotating collecting very fast from debtors and financing cost of that money will also be less .Since money recovered early so Liquidity is also there .

In contrast goodman will have financial burden to finance debtors 55 days with debtor turnovers 6.63 times in year and hence low liquidity.

Gross PROFIT:-

The Goodman earns Gross profits 39 % and Kwickwack 13 % -

G.P Ratio means Goodman earning 39 $ per 100 $ sale and Kwickwack 13 Per 100 Sale .

Hence Good man in Gross profit ratio aspect is better than Kwickwack as earning 26% Extra on 100 Sale .

Gross Profit = Revenue – Cost of Goods Sold

Inventory Turnover :

The inventory averaged kept in goodman warehouse since procure raw material to sale to customer 46 days and kwickwack 23 days .Hence for large number of days the money of good man is locked up compared kwickwack which is only 23 days so financial cost more goodman will bear and it will decrease profitability of goodman .

N.P Margin :- This is same 9.9 % for both cases .

Since both firm has same Net profit which means finally after deducting all expenses they are earning net 9.9 % margin on their sale . so both are same in this aspect profitable .

Formula = Revenue – Cost of Goods Sold-operating expenses-interest-Tax

Conclusion :-Goodman has higher G.P Ratio than Kwickwack That means more profitable in G.P Ratio compared kwickwack but Higher debtors collection days , inventory locked up days which increase its financing other operating costs brings its net profit down to 9.9 % same as kwickwack .

Kwickwack has lower G.P Ratio but less operating expenses hence its N.P Equals to goodman ..

These are equally profitable at end as per Net profit margin

Answer:2

Goodman as Giving credit facility to debtors of 55 Days whereas Kwickwack 22 Days hence customers would attract towards goodman which is its competitive advantages and earning the same Net profit margin 9.9 % after taking cost of financing debtors credit period as net profit earns by kwickwack hence We can conclude Good man more competiting .

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